Ten fun facts about the European bank stress tests

1) In the latest European bank stress test, Monte dei Paschi ended up with Tier 1 capital of -2.4% in the most stressed scenario

2) Although there was no official pass or fail awards, a negative capital ratio is pretty clearly an epic fail

3) Having sold €8 billion worth of stock since 2014, BMPS proposes to sell another €5 billion before year end...

4) ...providing they can also unload €9.2 billion worth of NPLs turds off of their balance sheet first

5) Since the imposition of negative rates in Europe (illustrated by the arrow), here is what the SX7E index has done

6) So naturally, the stress tests did not measure the impact of more negative rates, only a move higher in rates

7) This is the equivalent of measuring the impact of a dog whistle on a deaf person

8) More European banks failed the Fed's stress test (DB and Santander) than the EBA version (albeit, as noted, there were not official pass/fail grades this time around.)

9) If you can believe it, DB scored half a percent better on the stress test than Barclays

10) If you were wondering, by far the highest score on the EBA stress test was achieved by NRW.Bank in Germany. In a possibly related coincidence, their website looks like it's a school project for a middling web design student, though its career portal does offer applicants the opportunity to "venture into the fascinating world of finance!"

I've reloaded my short on the FTSE as per my target range. Now we enter the wonderful month of the year where the liquidity is sunbathing. We might actually make it through that month with the Vix levels being justified ,but in the true random nature of markets if we do get any blowout event then we get paid for having applied enough sunscreen.

LB's Bullet Points at the European close (we like it here but have to return to NY tomorrow):

1. Crude oil and High Yield appear to be on the point of recreating last November, where they gapped and crapped and then just dribbled lower, eventually taking segments of the (EEM, XLE) equity markets with them.

2. @Henner, yes you may be right that dollar strength is over after Q2 GDP. We'll have to sit through Friday's NFP to confirm that, but it is a decent thesis at this point. We can't get on board with long EURUSD, which leads us to suggest that:

3. Yen strength may have returned, although remarkably we did USDJPY -3¥ on Friday w/o any risk-off move in equities at all.

4. Italian banks have clearly ended their month in the sunshine at the Riviera and it's raining reversal candles.

5. Oil and Italy have supplanted China and the Fed as risk nodes capable of causing systemic risk aversion.

In today’s world, where prices of all sorts of assets are trading far above historical norms, it is worth recognizing that investors prepared to buy assets without regard to the price of those assets may also find themselves in a position to sell those assets without regard to price as well. This potential is compounded by the reduction in liquidity in markets around the world, which has been driven by tighter regulation of financial institutions, and, paradoxically, a greater desire for liquidity on the part of market participants. Making matters worse, in order to see massive changes in the price of a security, you don’t need the price-insensitive buyer to become a seller. You merely need him to cease being the marginal buyer. If price-insensitive buyers actually become price-insensitive sellers, it becomes possible that price falls could take assetprices significantly below historical norms. This is not to suggest that such an event is inevitable, still less is it an attempt to predict in which assets and when it will occur, but anyone conditioned to think that these investors provide a permanent support for the markets should be aware that the support may at some point be taken away.Who are these guys?

There are a number of different groups of investors that could be characterized as price-insensitive buyers. A less than exhaustive list would include the monetary authorities of emerging countries, developed market central banks, defined benefit pension plans (particularly in Europe), insurance companies, risk parity investors, and single-strategy and index-driven mutual fund managers

I analyse forex on the basis of a thirty day cycle(to make it short) and that's how I made my call on euro, so more dollar weakness for august could/should follow. September could be a whole different story.

CAD is positionned to be the weakest currency, it's the only one with a clear bearish cycle against dollar in july and all CAD crosses seem vulnerables. UCAD could become bullish again as soon as next week.

@abee 4:21, Inker also has an accurate observation regarding the impact of low discount rates: which can increase the present value of cash flows without any change in the future value. He illustrates this with reference to a zero-coupon bond. His observation is that discount rate sensitive (eg long term, predictable cash flow) assets have enjoyed a special bull market.

At one level this is obvious / self-evident, but the pv vs fv subtlety perhaps less so. I am in the process of thinking through the ramifications of this at present. Short XLU is perhaps the obvious equity market conclusion, but I'd be interested to hear other thoughts...

Sub $40 WTI today, for a few minutes at least, and there is no earthly reason for crude to reverse upwards at the moment. We have been calling for this since US rig counts began rising again, but it's happened faster than we expected.

Reflation trades and risk-on strategies may come under serious pressure fairly soon..... below $40 a lot of things just don't work any more. We are going to wake up soon to one of those big gap-filled charts in high yield - is this where the adults return to the desk and ask what the f*ck the 12 y-o traders think they are doing being long commodities and emerging markets during a profound deflationary event? Don't rule out seeing dollar/yen strength - for the very worst of reasons. When punters are long something illiquid that doesn't trade (high yield credit is the poster child for this) they will sell anything liquid (equities) and buy back what they borrowed to buy them (dollars, yen).

@celeriac I agree with the short XLU thesis in spades - people are way too complacent hiding in utilities because rates will stay low forever - they might be right on the rates thesis, but its a stretch to conclude that utility earnings will permanently cease to be a factor - I think the rotation into defensives has become a bit of a house of cards, with punters imagining the narrative while forgetting its their buying thats holding it up.

I tend to agree with most of what they are saying. Particularly the longer term view for inflation and demographic influences.Again ,it tends to follow the line taken by Gundlach that finding value in most assets is proving hard to do irrespective of so called risk classification.

cheers checkmate... i'm glad bi posted. those guys are insightful... from the last part of thier letter

Finally, there is really only one sector that would do breathtakingly well if we are right: financials. The banks just received the cleanestbill of health from CCAR and will be returning cash to investors through buybacks and dividends pro-forma at three percentwhen the stocks trade at their lowest valuation in their finest shape. This is in light of the S&P trading at its highest valuation and inquestionable shape. Timing is everything, and after a strong second quarter performance based on the positioning asymmetry thatwe discussed in our last two letters, we have paused somewhat. In the last two months, however, the market style evolved againstus almost perfectly; commodities and STUD have rallied sharply, the overall market has made new highs and our core long – banks– have dramatically underperformed.

If their thesis is inflation, continued economic growth aided by fiscal expansion, and continued Fed dovishness, then why would equities (including utilites) suffer? negative real rates would remain a tailwind, and economic conditions would support earnings growth.

The correlation between the economy and asset values is strongest in early stages of an economic recovery, and weakest in the end - normally you would get a recession which would render the asset question moot, but if things are kept on life support through more stimulus, resulting in a more and more geriatric cycle, then I can see a (admittedly unprecedented) negative correlation between the two - whats good for main street isn't always good for wall street.

There have always been price-insensitive holders. They are the life-blood of the traditional long-only investment management industry in both its active and passive guises. The volume of buy and hold propaganda aimed at private investors and their advisers is testament to this. Self-serving concepts like dollar/pound-cost-averaging support the idea of price insensitive buyers too.